Homebuyers are going down-market, buying significantly cheaper properties as the threat of further rate rises continues to weigh on sentiment, new data has showed.

The Australian Bureau of Statistics (ABS) revealed that the average loan size for owner-occupied housing commitments dropped to $230,000 from $233,900 in February. This marked a 6% drop from the highs recorded in June 2007.

The total value of owner-occupied housing commitments fell by 6%. This figure was dragged down by a hefty drop in finance commitments to buy second-hand housing. Investment housing commitments tumbled by 9.5% nationally following a healthy gain of 8.8% in January.

"Rate hikes clearly spooked budding homebuyers," said Savanth Sebastian, equities economist with CommSec. "Not only have loans recorded the biggest drop in four years, but borrowers aren't going ahead with loans, and smaller loans are being taken out. Smaller loans effectively mean that prospective homeowners are going down-market. Homeowners and builders will feel added bargaining pressure when trying to sell and increase the likelihood of downward pressure on house prices."

However, Sebastian noted that the compelling fundamentals suggest property will be very much in focus towards the end of 2008, despite the headwinds of higher interest rates. "Population is growing at the fastest rate in 18 years, but supply of homes isn't keeping up, resulting in soaring rents and property prices."